Pricing & Commercial Strategy

“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.” – Warren Buffet

By controlling one of the greatest profit levers, companies can price products and services to improve profitability; accelerate desired pricing competencies and behaviours; and increase their responsiveness to market changes Understanding end-to-end pricing approach enables organizations to take full advantage of leading practices and advanced technologies.

Before delving into that, let’s first look at 2 mentalities that affect the bottomline:

“Few companies have a pricing policy that is effectively linked to a commercial strategy.”

The Sales at all Costs Mentality

The sales-at-all-costs mentality that prevents companies walking away from deals; or the failure to link price with distinctive value propositions; or the ineffectiveness of market segmentation that leads to a ‘one price fits all’ mentality; and the failure to consider ‘unbundling’ so that customers can select the options that they most value.

The problem is not lack of pricing policy; it is once again the tendency to develop ‘specialisms’ that operate independently within the business. How can a ‘pricing expert’ ensure maximum returns if they have little or no insight to broader market considerations? They are limited by their expertise, in just the same way as the lawyer, the project manager, the category manager or the myriad of other ‘specialists’ that populate business today. The real issue is the absence of the commercial oversight that should be offered through a generalist asking the right questions and challenging the narrow wisdom of ‘the expert’.

The incentives Mentality

Any one involved in contracting – buy-side or sell-side – is well aware of the quarter-end banana curve and the year -end flurry in sales, driven by bonus schemes and incentives. Indeed, many buyers quite deliberately defer purchases and ensure that they sign only at the last minute, to extract maximum savings.

The weighting of business to quarter end creates massive inefficiencies in workload and puts tremendous stress upon processes and other areas of compliance and contract quality.

Sales professionals that have strong financial incentives to close a deal in a given quarter appear to grant discounts that are larger than necessary to win the deal in order to guarantee that the deal closes on the salesperson’s preferred timeline.

Pricing power is having the ability to raise prices at least a little without a huge negative impact on demand. What types of companies or products have that characteristic?

The Right Strategy to Grow Pricing

Three types of products or companies have this power.

First, there are “Will I?” products - those products where buyers make the decision “am I going to buy this or not?” They don’t choose between competitive products. Examples of Will I products include popcorn at the movie theater, iPhone, Rolex watch, meat grinder option on a kitchen-aid mixer, bottled water in a hotel room, and any product with a monopoly. In each one of these cases, companies have the ability to raise prices at least slightly without a significant impact to demand.

Next are highly differentiated products. If you can create a product that is so much better it practically stands on its own you have significant differentiation. This is especially true when you target a market niche and add a capability specific to that niche that your competitors don’t have. These products are similar to Will I products except that there is a competitor; it’s just that the competitor is significantly inferior (or at least different).

The third key type of pricing power comes from large portfolios where a company owns the entire ecosystem. A great example of this is Apple, with Macs, iTunes, iPods, iPhones, iPads, and Apple Watches all working together on a single platform. Apple is able to set and maintain high prices because most of their customers are committed to their ecosystem. Most users choose to go all Apple because they know everything works well together.

In essence, if you are able to show differentiation in your product or way of doing things followed by being in the most valuable markets for your products and services – that allows your product to have pricing power.

There also needs to be an understanding of what drives value and choice for your customers and with those customers, having profitable relationships with the customers that really matter. And that is all about communicating your value in a compelling way.